Crackdown on phoenix companies goes too far: experts

LEGISLATION aimed at cracking down on phoenix company operators will still "catch out" and penalise innocent company directors, experts have warned, despite government changes to the draft laws.

By InvestSMART · 26 Apr 2012

By InvestSMART ·
26 Apr 2012

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LEGISLATION aimed at cracking down on phoenix company operators will still "catch out" and penalise innocent company directors, experts have warned, despite government changes to the draft laws.

The proposed laws, introduced to Parliament in November, will make directors liable for workers' unpaid superannuation, targeting operators of so-called phoenix companies - failed businesses resurrected in a different guise, avoiding paying debts to creditors and employees.

The government unveiled the revised draft legislation a week ago, revealing several changes aimed at addressing industry concerns.

But accountants and insolvency specialists said a key issue had not been fixed - that directors not attempting to "phoenix" a business in difficulty could be forced to sell personal assets or go bankrupt to meet the business's unpaid superannuation and taxes withheld from wages.

The Worrells partner Matthew Jess said it would catch out innocent directors. "It is something that will affect everyone who falls behind in superannuation and tax debts ... it does not distinguish between legitimate business failure and so-called phoenix operators."

Parties have until May 2 to comment on the revised laws, and Andrew Yeo, at Pitcher Partners, said this was not enough time.

"This is the most dramatic impact on personal liability of directors of any legislation that exists at the moment," he said.

Under the draft laws, the Tax Office could move to seize personal assets of directors of a company that was three months or more behind in its superannuation and pay-as-you-go withholding tax - and they would not be able to place the company into voluntary administration or liquidation to protect their assets.

Mr Jess said this "significantly" changed the current law, which gave directors 21 days notice before the Tax Office could act - including when the debt was older than three months. The laws would encourage directors to pay out the Tax Office ahead of other creditors and would appear to have a greater impact on increasing tax revenue than overcoming fraudulent activity or protecting workers' entitlements.

A spokesman for the assistant treasurer, David Bradbury, said the legislation "made it clear" directors had an obligation to ensure superannuation was paid and those who used phoenix companies to avoid debts would be held liable.

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Frequently Asked Questions about this Article…

What are the proposed draft laws targeting phoenix companies?

The draft legislation introduced to Parliament aims to crack down on so-called phoenix companies by making directors personally liable for workers' unpaid superannuation and pay-as-you-go withholding tax when a company falls behind. The government says the reforms are designed to hold operators who use failed businesses to avoid debts accountable.

Who could be affected by the new rules on unpaid superannuation and withheld tax?

While the laws target phoenix operators, accountants and insolvency specialists warn they could also catch innocent directors and legitimate small-business owners who fall behind on superannuation or PAYG withholding. Experts say the rules do not clearly distinguish between deliberate phoenix activity and genuine business failure.

What new powers would the Tax Office have under the revised draft legislation?

Under the revised draft, the Tax Office could move to seize personal assets of company directors if the company is three months or more behind in paying superannuation and withholding tax. Directors would also be prevented from using voluntary administration or liquidation as a shield to protect those personal assets in that situation.

How do the proposed changes differ from the current law on Tax Office action?

Experts note a significant change: current law gives directors 21 days notice before the Tax Office can take action, even for debts older than three months. The draft laws remove that buffer, allowing the Tax Office to act sooner and potentially forcing directors to prioritise tax debts over other creditors.

Could the draft laws force directors to sell personal assets or go bankrupt?

Yes. Accountants and insolvency specialists warned that directors who are not attempting to phoenix a business but fall behind on super or withholding tax could be forced to sell personal assets or even face personal bankruptcy to meet those unpaid obligations under the proposed rules.

How might the changes affect employees and other creditors?

Some experts say the laws could encourage directors to pay the Tax Office ahead of other creditors, which may prioritise tax revenue collection over recovering employee entitlements or other creditor claims. The reforms are intended to protect workers, but critics argue they may not achieve that balance.

What have industry experts said about the draft changes and the consultation period?

Industry figures such as Matthew Jess of Worrells and Andrew Yeo of Pitcher Partners warned the draft laws could unfairly catch out innocent directors and called the proposed changes the most dramatic increase in personal liability for directors. They also said the consultation window—parties have until May 2 to comment—was too short.

What does the government say about directors' obligations under the new laws?

A spokesman for Assistant Treasurer David Bradbury said the legislation makes it clear directors have an obligation to ensure superannuation is paid and that those who use phoenix companies to avoid debts will be held liable. The government frames the reforms as a way to protect workers' entitlements.